3M’s Earnings Preview: Revenue Growth Driven By Electronics & Energy, Safety & Graphics And Industrials Segments

3M (NYSE:MMM), a multinational conglomerate, is set to announce its second quarter results on October 23. In the second quarter, 3M’s revenue grew 4.8% year-on-year, to reach $8.1 billion. ^[1] All five of 3M’s business segments – Industrial, Safety and Graphics, Health Care, Electronics & Energy, and Consumer – posted positive organic local currency sales growth in the quarter, in line with the company’s guidance. Organic local currency sales do not include the impact of acquisitions or currency fluctuations. We expect to see broad-based growth across all of 3M’s segments in the third quarter as well. Sales of display materials, purification systems and automotive OEM products could be primary driving factors for the third quarter revenue. The growing industrial and housing and construction activity will also contribute to 3M’s revenues.

During its second quarter meet, 3M reaffirmed its full year earnings per share guidance range of $7.30 to $7.55. ^[2] The company reduced its guidance for capital expenditure from $1.7-$1.8 billion to $1.5-$1.6 billion citing better understanding due to portfolio management efforts. 3M reiterated its intention to invest $5 billion to $10 billion in acquisitions through 2017.

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Electronics & Energy Segment to grow on sales of display materials

3M’s display materials include films that help enhance viewing pleasure on devices with displays and adhesives that help bonding display parts, lens, LCDs, and touch screens. These products are purchased by electronic original equipment manufacturers and display manufacturers. The sales of display materials and systems are highly dependent on sales of consumer electronics. In 2013, the U.S. Consumer Electronics industry generated $207 billion. ^[3] Growing demand for smartphones, tablets, and LCD, UHD and OLED TVs will continue to drive growth in the U.S. Consumer Electronics industry, the sales for which are expected to cross $211 billion in 2014.

In the second quarter, sales of 3M’s Electronics & Energy segment grew 6.4% year-on year driven by 11% growth in display materials and systems. ^[4] Continued growth in sales of consumer electronics will help drive sales for 3M’s display materials in the coming quarters.

Growth in industrial, housing and construction activity will drive 3M’s Safety & Graphics Segment

3M’s personal safety products portfolio includes maintenance-free and reusable respirators, personal protective equipment, head and face protection, body protection, hearing protection and protective eye-wear, and they are used to protect workers’ health and ensure their safety in an industrial environment. Growth in industrial activity encourages sales of these safety products.

Industrial activity in the U.S grew 3.2% in the third quarter of 2014, which is close to the average quarterly increase since the end of 2010. ^[5] Sales of 3M’s safety products in the second quarter will have benefited from growth in industrial activity in the U.S. But sales in Europe may have been sluggish given the fluctuation in industrial activity in July and August. It grew 1.7% year-on-year in July but decreased 0.8% in August. ^[6]

3M sells roofing granules directly to roof shingles manufacturers. Sales of granules are highly correlated to the construction industry, which has been booming in the U.S. Housing starts have been fluctuating a lot in 2014. After a strong 1.117 million in July, housing starts declined to 956,000 in August. ^[7] However, these numbers were up 24% and 8% year-on year in July and August respectively, indicating a continued upward trend. Housing starts increased 18% year-on-year in September. Building permits have also been up year-on-year. These trends are driving the forecast for a 7.7% increase in housing starts in 2014, which should continue to have a positive impact on sales of 3M’s roofing granules. ^[8]

Purification systems and automotive OEM products will help drive 3M’s Industrial segment

3M’s purification business offers air and water filtration products for residential, commercial and industrial use. The global market for water purification equipment is expected to grow 10% every year till 2018, driven by growing awareness and need for clean water in developing countries like India and China. ^[9] 3M’s global presence and large number of water purification products position it to benefit from the growth, leading to an increase in its Industrial segment revenues.

3M offers a number of products that are used for manufacturing, repair and maintenance of automobiles. Sales of these products are highly correlated to production of vehicles and average vehicular age. Driven by recovery in the economy, the North American light vehicle production has grown from 8.6 million units in 2009 to 15.5 million units in 2013. ^{[10] [11]} Production is expected to grow at a rate of 4% in 2014 driven by increase in consumer spending and high average vehicular age. 3M is set to benefit from continued growth in automobile production since it will have a positive impact on sales of its automotive OEM products, which will help drive overall revenue.

3M expects its industrial segment to grow 3%-6% in 2014. We believe this growth will be driven by continued strengthening in the global economy and growth in end markets such as automotives, chemicals, industrials, construction and packaging. The recent acquisition of Sumitomo 3M should also be accretive to its revenues.

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1. 3M’s Q2 Earnings Press Release, July 24 2014, www.3m.com [↩]
2. 3M Company’s (MMM) CEO Inge Thulin Q2 2014 Results – Earnings Call Transcript, July 24 2014, www.seekingalpha.com [↩]
3. Industry Sales Data, www.ce.org [↩]
4. 3M’s Q2 Earnings Presentation, July 24 2014, www.3m.com [↩]
5. Industrial Production and Capacity Utilization, July 16 2014, www.federalreserve.gov [↩]
6. Eurostat News Release, October 14 2014, epp.eurostat.ec.europa.eu [↩]
7. US Housing Starts Historical Data, www.ycharts.com [↩]
8. NAHB Housing and Interest Rate Forecast, September 16, 2014, www.nahb.org [↩]
9. Global Water Purifiers Market Forecast & Opportunities 2018, October 29 2013, www.prnewswire.com [↩]
10. IHS Automotive Production Barometer, January 2011, www.ihs.com [↩]
11. North America Production Summary February 2014, www.wardsauto.com [↩]